Tokenomics: The Basics, The Core, The Significance

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According to historians, the very first long distance trade occurred in 3000 BC between Mesopotamia and Indus Valley. Long distance trades between two cities such as this one started occurring with the realization that the other city has something that I need and we have something that they fancy.

The efforts and time to travel across the terrain called for the trading of just luxury goods. You have the gold for my jewellery and I have the silk for the fancy robe you desire. Of course, if I had the rice instead of the silk, that would not interest you because of the lack of UTILITY since you are growing rice in the farm next to your house.

Barter, though, started a phenomenon and gave a new means of healthy survival to mankind, yet it was always difficult to perform. Thence, came the concept of coins of different values — a single entity that can trade every object of necessity, desire, and luxury — the ultimate product of UTILITY.

Since 3000 BC till date, the very essence that remains at the core of trading or any business is UTILITY.

This is what we call TOKENOMICS.

The mechanics of implementing a token or coin within an ecosystem such that people UTILIZE it to exchange goods and services within that ecosystem, bringing the token into circulation and UTILITY, is called ‘Tokenomics’.

In the crypto world, when a company makes a blockchain-based product, it also develops tokens that is used to facilitate transactions in its ecosystem. These tokens are also called ‘coins’ of that ecosystem.

Let’s discuss the essentials of tokenomics and see what defines a good one for an ecosystem.

A successful tokeomics structure comes with a 5-pointer blueprint.

For the first point, let’s start with a real world example. Let’s talk about YouTube, a video content provider. Suppose, it decides to bring the process on blockchain. Now there are two ways to tokenize — one, they tokenize the user login, which implies that content uploaders get equal number of tokens for every user logging in. This clearly seems the easy way out.

But it disincentives the uploaders who provide better quality and are watched more. Hence, the better solution is to incentivize the usage or consumption.YouTube, in fact, works on the same model.

Secondly, it is important to understand that tokens are nothing but digital string of characters and are much easier to replicate than replicating notes of currencies. So, the developers need to keep a hard cap on the number of tokens circulating in the market to prevent facing the perils of inflation that may cause the value of token to plummet.

Thirdly, it is very essential to maintain the delicate balance between percentage of frozen tokens and that of those allocated to market use. If there are not enough tokens in the market, it hinders making enough transactions and the token utility dies gradually. This goes in direct relation with a real world situation wherein if the government taxes majority of your income, you are left with inadequate money to buy the things you require.

Fourthly, and focus on this one, tokenization is for transactions not hoarding. There are multiple stakeholders responsible to raise the price of a token. But it is always in danger of being hoarded by those who are anticipating its appreciation. This also brings in the condition of centralization as this gives control to a limited number of token holders.

Lastly, an indication of a strong token is its listing on multiple exchanges. This shows that the token is trading on a fair market value and not on other unacceptable factors.

The Art of Token Allocation

 
Token Allocation / Use of Proceeds

As a part of your tokenomics structure, you need to specify the allocation of the tokens and define where you are going to utilize it post your ICO completion. The image above depicts the percentage of tokes allocated to different sectors of Marketing, Development, Legal, Reserve, and so on. This goes on to build trust amongst the users that you are not a scam and also informs them about your plans on how you are going to increase your token adoption.


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